$516 an Ounce

December 31, 1979

THE LATEST WILD LEAP in gold prices is great news if you happen to be a speculator with several bars buried away in a bank vault or in your back yard. It will be heartwarming for South Africa and the Soviet Union, the major gold-producing countries. For everyone else it's a nuisance, an irritant, and perhaps worse.

Traditionally, the fluctuations of gold prices had little more than what the financial crowd calls psychological significance. They were an indication of the state of the financial crowd's nerves, but they had little impact on the way the world's real economies worked.

But at its present level and rate of rise, the price of gold is not only a reflection of a certain kind of speculation, but also a positive inducement to continue it. The sight of people getting rich off nothing but a few phone calls inevitably draws more people into the game. Gold is merely the most visible and countable commodity in a vast and soaring market in nonproductive speculative assets -- paintings, antiques, jewels and a great variety of metals. A lot of the world's loose wealth is now going into that market. When speculative money goes into the other kind of assets -- tools, business expansion, new construction -- it generates jobs, higher productivity, better living standards and good things like that. But the ounce of gold that sold last week for $516 is no more useful than it was a decade ago when it went for $35 -- and if, like most gold, it is sitting in a safe deposit box, it is not useful at all.

There is also the ominous historical point that this kind of speculative binge has generally ended badly. Often in the past these surges have crested without warning and suddenly collapsed. When a price collapses, the speculators' wealth isn't merely transferred to to someone else to spend. It simply vanishes. That's the first phase of the classic financial panic, which can then easily translate itself into real economic distress for all sorts of people who never had anything to do with the original speculation. Theoretically, the world's present system of money and credit has been well buttressed against that kind of shock. But whether the protection suffices cannot be known until it is actually tested.

It's obvious that the gold price is being driven upward by people, mostly from the Persian Gulf, with very large amounts of oil money to invest -- or to hide. But perhaps there's a further -- and -- tighter -- relation emerging between oil and gold. Hints have appeared in recent months that some of the sellers of oil are coming to think of its price not in dollars, but in ounces of gold. A year ago, a barrel of oil was worth 0.06 ounces of gold; by midsummer, it was up to nearly 0.07 ounce. Since then, the average official price of oil -- in gold -- has fallen to about 0.055 ounces. While the buyers complain bitterly of the terrific price in dollars, some of the sellers apparently are aiming at getting back up to the previous gold-to-oil ratio. If that is true, the prices of gold and oil may be pushing each other upward iin a vicious circle. It's a certain formula for the regrettable phenomenon that the financial crowd -- along with everyone else -- calls a speculative crash.